To Tax and to Please…

The gay marriage debate extends all the way to the tax code

President Barack Obama’s surprise announcement last week of his support for gay marriage has the whole country talking about either the equality or sanctity of marriage, depending on your political perspective.

Though the President’s announcement has no practical effect on government policy, it has exposed the shifting fault lines in America’s culture wars. Since 1996, when Congress and President Clinton passed the Defense of Marriage Act (DOMA) defining marriage exclusively as the legal union of one man and one woman, public opinion has changed across the political spectrum. As Slate observes,

Democrats, who initially opposed gay marriage and then were evenly divided, are gradually uniting in favor of the idea. Republicans, who used to be united against gay marriage, are becoming more closely divided. And independents, who used to lean against gay marriage now lean toward it. In 2004, if you raised gay marriage as a wedge issue, you divided Democrats, united Republicans, and pushed most independents to the right. Today, if you raise gay marriage as a wedge issue, you divide Republicans, unite Democrats, and push most independents to the left.

And as open gay couples – even some with kids (gasp!) – become a fact of life in more areas than just San Francisco and Manhattan, people are beginning to turn an eye to the practical consequences of gay marriage, including taxes.

The most obvious tax consequence of DOMA is that same-sex couples can’t file a joint tax return, which denies them all the benefits that the married filing jointly status can bestow. Most married couples choose to file a joint return – and not just so one spouse can get out of preparing a return.

According to the IRS, “if you and your spouse decide to file a joint return, your tax may be lower than your combined tax for the other filing statuses. Also, your standard deduction (if you do not itemize deductions) may be higher, and you may qualify for tax benefits that do not apply to other filing statuses.”

Plus the issue of children make things even more complicated. If the two same-sex parents can’t file a joint return, only one of them can claim their child as a dependent, and get all of the attendant tax benefits.

Gay couples’ tax bills can often be thousands of dollars greater than their straight counterparts, simply because they are denied the ability to file a joint return.

But while many have made a big deal about the benefits gay couples aren’t able to receive while they’re together, relatively few have made note of the costs they incur when their relationships end. When gay partners try to divide assets between them at the end of a relationship, they could get hit with gift and income taxes that wouldn’t affect straight married couples at all.

If you are married and divorce, you can divvy up property tax free. Again, there’s no limit. So if you jointly bought a house, you can transfer your interest to your ex without tax.

Not married? Same sex or not, if you’re not married unwinding a relationship can be very taxing, including income taxes, gift taxes or both. Suppose you give your half of the house to your ex-partner and receive nothing in exchange? You’ve made a taxable gift.

Suppose you’re not feeling that generous and instead deed your half of the house to your ex in exchange for some of your ex-partner’s stock holdings. You both could be hit with income taxes. As the departing partner, you’ll be treated as selling your half of the house to your former partner.

Suppose you bought the house together decades ago for $400,000 and it is now worth $1,000,000? Your half has a $200,000 basis and a value of $500,000. That means you, the departing partner, will have a $300,000 gain. If you qualify for the exclusion on sale of a principal residence (up to $250,000 per person), only $50,000 of it is taxable.

What about the ex-partner who is keeping the house and handing over $500,000 in securities? If the staying-put partner’s basis in the stock is $300,000, he or she will have a $200,000 gain. But here’s the kicker: If the same couple had been married, there would be no taxes paid on these asset transfers.

The President’s announcement will surely not be the last shot fired in this battle, and Americans everywhere have very strong opinions. But before we allow our emotions to get the better of us, we would do well to consider the cold, hard, dispassionate calculus of the tax code and how it affects millions of Americans when they file a return.

One Response to “To Tax and to Please…”

Well, if same-sex marriage is allowed, it’s only a matter of time before they can file their tax as a joint. Because you know, it’s like granting you half of the rights now, and when it is ready, we’ll give you the other half, something like that. It’s going to depend on how many of the same-sex marriage couples actually demand the rights to file a joint tax return. If not that many people actually know of the possibility, then there’s not much hope in changing the tax laws. Just ask ourselves, you know, how many of us regular citizens actually know what’s the benefits of filing tax as a single, married, or head of household? Joint or not, if not too many couples know the benefit they’ll get, then not much demand for the tax law is going to get changed. There’s also the problem of when these couples actually move out to a state where same-sex marriage is not granted (yet), then how would tax filings be affected? I mean, let’s say the state you’re in has tax laws regulated to fit with the same-sex couples, but now those couples moved to another state where same-sex is not allowed? How would they file their tax?